Monday, July 8, 2013

2013 Hong Kong Hang Seng Index (HSI) Target

Hang Seng Index (HSI), launched initially on 24 Nov 1969 and now owned by Hang Seng Indexes Company Ltd., is known as the most reputable securities index in Hong Kong. HSI, by definition, includes the biggest and most liquid stocks listed on Hong Kong Stock Exchange (HKEx stock code:, with a 15% maximum weighting limit for individual stock to avoid single stock domination in the index.

By end-2012, Hong Kong Hang Seng Index (HK-HSI) gained by +22.9% YoY to 22657 at its annual close. Although it represents a 16% deviation from our initial target of 19481, the direction (went upwards) was still a correct estimation. This time our team, Mr China, determines our own 2013 Hang Seng Index (HSI) target as 21392, which means we are expecting an annual loss of -5.58% YoY from 22657.

For many people concerned, Hang Seng Index (HSI) is indeed a very interesting stock market investment index. On the one hand, HSI is greatly affected by U.S. monetary policy, especially under the current USD/HKD peg system. On the other hand, HSI is also greatly affected by Chinese economy as H-share of China Enterprises and China Red Chips listed in Hong Kong already contribute respectively 34% and 18% of index weightings. Practically, foreign investors consider HKSAR (Hong Kong Special Administration Region Government) as a proxy to invest in China and hence HSI is always a good investment indicator for China stock market.

Hang Seng Index (HSI) now consists of various industry weightings such as Financials (banks, insurance, other financials), Energy (coal, oil and gas), Properties and Construction, Telecommunications, Utilities, Information Technology (IT hardware, semiconductors, software and services), Services (retails, transportation, hotels and entertainment, media and publishing, support services), Materials (mining, metals, basic materials), Consumer Goods (automobiles, health and personal care, agricultural products, food and beverages, textiles and clothing, household goods and electronics), Industrial Goods, and Conglomerates, etc.

Our independent Hong Kong equity market expert team has predicted the fair values of the above-mentioned industry weightings and then put these fair values into the required Hang Seng Index (HSI) Formula. With our expected stock valuations and HSI constituent weighting calculations, our 2013 Hong Kong Hang Seng Index (HK-HSI) target is thus calculated as 21392. Here are the basic assumptions for this 2013 HK-HSI target:

(1) Same as the past year, we expect Chinese economy slow down process will continue in 2013 (Reference: 2013 China GDP Growth). Besides, People's Bank of China (PBoC) has recently started regulating uncontrolled lending business of Chinese commercial banks by refusing to pump extra liquidity to the money market. This would encourage stated-owned banks to provide necessary funding for supporting real economy instead of just putting wasteful investments on industries with excessive productivity. Although such banking market reform proposed by Chinese central government should be good for long-term economic development, this has unavoidably induced a sudden spark in overnight SHIBOR (Shanghai Inter-Bank Offered Rate) in June and has also triggered de-leveraging process of Chinese commercial banks. We believe this de-leveraging process will continue throughout the year of 2013. Hong Kong stock market performance will therefore be negatively affected by this tighter liquidity condition as well as credit market contraction.

(2) Although European sovereign-debt crisis is still there in 2013, U.S. Federal Reserve has already officially announced the exit roadmap for its quantitative easing (QE) program. U.S. Federal Reserve has planned to start cutting its bond purchase size by end-2013 and then completely stop purchasing government bonds by mid-2014 under the current economic recovery expectation. The expected end of U.S. quantitative easing (QE) program will undoubtedly induce surges in US government bond yield as well as USD dollar index. It will also subsequently make hot-money flowing out from emerging markets including Hong Kong, and thus will bring heavy selling pressure on Hang Seng Index (HSI) constituent stocks in 2013. Of course, if the U.S. economy can really recover, it will at least benefit exports from China and Hong Kong by then.

(3) Although there are still political arguments towards HKSAR new administration led by Chief Executive (HKCE) CY Leung, CEPA (Closer Economic Partnership Arrangement) implementation will continue in 2013 to support steady growth of Hong Kong economy and thus HK will continue to benefit from China capital market opening-up. Reference: Hong Kong CEPA Implementation.

With reference to our own rating valuation, the existing Hang Seng Index (HSI) level of 20803 (as of end-Jun 2013) should be rated "reasonable".

 Hong Kong Hang Seng Index (HK-HSI) Chart

Current Hong Kong Hang Seng Index (HK-HSI) Chart Trend

Continue with our previous Hang Seng Index technical analysis, it is still possible that the latest peak level of 24989 was the final rally prior to the end of this round of bull market since November 2010. This is, however, not yet conclusive because the current transaction volume in Hong Kong securities market is still very thin. Technical analysis now becomes very much unreliable since translation volume has been thin and thus not yet representable. We therefore do not encourage investors to make intensive use of technical analysis and take their calculated results of technical analysis as their only source of investment decisions. In today's market conditions, technical analysis should at most be used as a reference only.

The 21392 is presumably our initial-release number value of Hong Kong Hang Seng Index (HK-HSI) target in 2013. Just like previous years, we may decide to upgrade/downgrade our own 2013 HSI target later shall the Hong Kong equity market valuation change.

Additional Index Performance Targets:
Table Summary: Additional List of Our Index Performance Targets


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